Southern Company (SO) Q1 2014 Results Earnings Conference Call April 30, 2014 1:00 PM ET

Executives

Dan Tucker - VP of IR and Financial Planning

Tom Fanning - Chairman, President and CEO

Art Beattie - Chief Financial Officer

Analysts

Greg Gordon - ISI Group

Jim von Riesemann - CRT Capital

Dan Eggers - Credit Suisse

Steve Fleishman - Wolfe Research

Michael Lapides - Goldman Sachs

Paul Ridzon - KeyBanc

Anthony Crowdell - Jefferies

Ali Agha - SunTrust

Kit Konolige - BGC

Julien Dumoulin-Smith - UBS

Ashar Khan - Visium

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Southern Company First Quarter Earnings Conference Call. During the presentation all participations will be in a listen only-mode. Afterwards we will conduct a question-and-answer session. (Operator Instructions). As a reminder, this conference is being recorded today, Wednesday, April 30, 2014.

I would now like to turn the call over to Dan Tucker, Vice President of Investor Relations and Financial Planning. Please go ahead, sir.

Dan Tucker

Thank you, Nelson. Welcome everyone to Southern Company’s first quarter 2014 earnings call. Joining me this afternoon are Tom Fanning, Chairman, President and Chief Executive Officer of Southern Company; and Art Beattie, Chief Financial Officer.

Let me remind you that we will make forward-looking statements today in addition to providing historical information. Various important factors could cause actual results to differ materially from those indicated in the forward-looking statements, including those discussed in our Form 10-K and subsequent filings.

In addition, we will present non-GAAP financial information on this call. Reconciliations to the applicable GAAP measure are included in the financial information we released this morning as well as the slides of this conference call. You can follow along by accessing the slides posted on our Investor Relations website at www.southerncompany.com.

At this time, I’ll turn the call over to Tom Fanning.

Tom Fanning

Thank you, Dan. Good afternoon and thank you for joining us. Art will go through the details in a few minutes, but first I would like to highlight two of the key drivers of our first quarter earnings growth; cold weather and continued economic growth.

First, the weather story. Around the industry, much has been reported lately on the polar vortex, the Southeast experienced the second coldest first quarter in the last 20 years and we set a new all time winter peak on our system of 39,130 megawatts. While the colder than normal weather had an obvious impact on revenue, that’s not the only important story.

Operationally the Southern Company’s system delivered on our commitment to provide clean, safe, reliable and affordable energy to the customers and communities we serve as demonstrated by our crew’s tireless work under the most challenging of circumstances to restore power to nearly 800,000 customers affected by the severe ice storm in mid February. The winter weather also underscored the importance of developing the full portfolio of energy resources. As weather-related demand and delivery challenges proved once again how volatile natural gas prices can be, Southern Company dispatched one of the industry’s most diverse and the liable generation fleets, delivering more than $100 million in fuel cost savings by taking advantage of our fuel optionality.

Second, the economy continues to improve. 9 of our 10 largest industrial sectors which account for approximately 80% of industrial sales reflected positive year-over-year growth for the first quarter and all 10 of them were positive in March. Combined with solid customer growth and usage growth in our residential class, we were increasingly confident in the sustained momentum of the Southeast economy.

Let’s turn now to our major projects. Construction progress continues at Plant Vogtle Units 3 and 4 in Georgia and at the Kemper County energy facility in Mississippi. First, tremendous progress continues in the construction of the Vogtle project which remained on schedule for the fourth quarter of 2017 and fourth quarter of 2018 for Units 3 and 4 respectively.

Nearly two months ago, as planned, we successfully executed the heaviest lift to-date placing the 2.2 million pound CA20 module into the Unit 3 Nuclear Island. Our critical path focus remains on the major elements of the Unit 3 Nuclear Island with the CA05 module scheduled to be installed in the second quarter.

Other signs of our continued construction progress include the walls and concrete under the containment vessel, which will support the installation of the shield building panels later this year. Outside of the Nuclear Island, we continue to progress on the major other elements including the cooling tower and turbine building.

We are also very pleased with the progress on both the Unit 4. The CR-10 module, commonly known as the cradle was placed in the Nuclear Island during the first quarter and the containment vessel’s bottom head is scheduled to be set in May.

In February, U.S. Department of Energy Secretary Dr. Ernie Moniz joined us as the Vogtle site to commemorate America’s first loan guarantee for nuclear construction. The DOE loan provides a committed source of funds that reduces financial risk, while delivering an estimated $250 million and present value benefit to Georgia Power customers. These savings should translate to lower base rates for customers over the life of the loan.

Including the DOE loan benefits, Georgia Power highlighted $2.3 billion of customer benefits in the combined 9th and 10th VCM report filed at the end of February. This came on the heels of the favor vote by the Georgia PSE to verify and improve the actual capital cost reflected in the 8th VCM. The current VCM report, which reflects $389 million of actual 2013 spending is expected to be voted on by the commission in August.

Turning now to the Kemper project, where we are winding down construction and ramping up our start-up activity. We continue to work toward our next major milestone, the heat up of the first gasifier, which is now scheduled for mid to late summer.

Additionally, we expect to place the combined cycle portion of the plan in the commercial operation this summer. As we mentioned last quarter, the start-up activity for the combined cycle are largely complete and it is expected to be able to serve customer’s energy need during the upcoming peak season.

As we shared in our most recent disclosure, we’ve experienced decreases in construction labor productivity due to a combination of adverse weather, labor turnover and inefficiencies. Having assessed the impact of these issues and the risks that additional unanticipated factors could have on the construction and start-up of the project, we’ve recorded an additional pre-tax charge of $380 million.

This estimate includes the previously disclosed $184 million in increased labor and weather related expenses and additional $135 million due to the extension of the expected in service date and 61 million of incremental construction costs as an adjustment to the earlier number.

Our confidence remains high in the value of the TRIG technology and the entire Kemper project to Mississippi Power’s customers. Our ongoing commitment to safety and quality is a primary importance as we focus on completing construction of this first of a kind plant and working through instrumentation and controls integration that is critical for the project success.

Meanwhile, Southern Power continues to expand its generation portfolio. Recently Southern Power closed on the 20 megawatt Adobe Solar Facility, our second solar plant in California. This brings Southern Power’s solar portfolio to approximately 222 megawatts, all with quality, long term contracts.

We continue to work diligently on additional projects and hope to announce another solar acquisition very soon. Looking ahead, we remain confident in Southern Power’s ability to execute its business plans for remainder of the year.

I will now turn the call over to Art for a financial and economic review.

Art Beattie

Thanks Tom. For the first quarter of 2014, we earned $0.39 per share compared to $0.09 per share in the first quarter of 2013, an increase of $0.30 per share. Included in these results for the first quarter of 2014 is an after tax charge against earnings of $235 million or $0.27 per share related to the current cost estimate for Kemper as detailed in the 8-K we filed yesterday.

Included in the 2013 results are after tax charges of $333 million or $0.38 per share for increased cost of the Kemper project and $16 million or $0.02 per share for the restructuring of a leveraged lease investment. Excluding these items, we earned $0.66 per share in the first quarter of 2014 compared to $0.49 per share in the first quarter of 2013, an increase of $0.17 per share.

The major factors which influenced our year-over-year adjusted earnings were weather, economic growth and retail revenue effects at our traditional operating companies. A detailed summary of the earnings drivers can be found in our slide deck for this call.

Weather in the first quarter of 2014 compared with the first quarter of 2013, added $0.08 per share to our earnings. Weather was $0.07 above normal for the first quarter of 2014, compared with $0.01 below normal for the first quarter of 2013.

Average temperatures were almost 5 degrees below normal and as a result, we saw the second highest number of heating degree days in 20 years.

Total weather normal retail sales for the first quarter of 2014 increased 1.3% compared with the first quarter of 2013. Our original forecast was based on a GDP growth estimate of between 2.5% and 2.7%. While it’s still early in the year, it appears as though GDP growth estimates could actually be between 2.7% and 3%.

Weather normal residential sales increased 1.2% over the first quarter of 2013. Residential sales were positively affected in almost equal parts by an increase in usage, reflecting demand growth beyond the amount avoided through energy efficiency, and the addition of 10,000 new customers in the first quarter of 2014.

The first quarter industrial sales increased 2.8% compared with the first quarter of 2013, continuing the strong performance and momentum seen for 10 straight months. Manufacturing employment growth in our service territories exceeded the national pace in a first quarter that featured growth that was very broad-based. Some specific examples of segments that performed particularly well were primary metals and transportation, which grew at 6.4% and 6% respectively. In addition housing related segments including stone clay and glass, textiles and lumber as group grew approximately 6% year-over-year.

This positive momentum was also evident at the port of Savannah where container exports increased 8.1% over the first quarter of 2013. Finally, one of the best leading indicators is economic development activity. The pipeline remains robust with 340 potential projects that could deliver 30,000 more jobs and generate more than $11 billion in additional capital investment.

This reflects a 58% increase in projects, a 46% increase in potential jobs and a 107% increase in potential capital investment, compared with the same period last year. This potential is on top of a very strong quarter of announcements, which are expected to create an additional 3,000 additional jobs and represents $4.5 billion in new capital investment.

Before turning the call back over to Tom, I’d like to share two additional items. First, as we have shared many times over the years, Southern Company is committed to maintaining a high degree of financial integrity including our single A credit rating. This commitment has served our customers and shareholders well by providing low cost financing and beneficial access to the capital markets.

Our plan to issue equity, which included a total of $1.3 billion of new equity over the 2013 and 2014 time frame contemplated additional risks for the Kemper project.

As a result and based on all of our current assumptions, we do not anticipate the need to increase our equity issuances due to the new charges reflected in our earnings results. We continuously monitor our capital structure and relevant credit metrics. As conditions change whether it is unexpected cost or better than expected success in acquiring new project at Southern Power. We will reforecast our equity needs as necessary.

Finally, I'd like to share with you our earnings per share estimate for the second quarter of 2014, which is $0.66 per share.

I'll now turn the call back over to Tom for his closing remarks.

Tom Fanning

Thank you, Art. Earlier this month, our Board of Directors voted to increase Southern Company’s common dividend to an annualize rate of $2.10 per share an increase of approximately 3.5%. This marks the 13th consecutive year that our dividend is increased. In fact since 2002, our dividend has increased a total of 57%. This track record is a direct reflection of the strength of our business model and the region our company serves. We have the privileged of serving 4.4 million customers in a region with an improving economy and a stable constructive regulatory environment. Our value proposition is bolstered by our ability to deliver industry leading customer satisfaction, lower electricity prices and the highest level of reliability.

In fact, the success of our customer focused strategy and how well this positioned the company to earned top quartile returns and generate strong operating cash flow over the long-term is the underpinning of our Board’s dividend action.

Despite our challenges with the Kemper project. Our performance during the first quarter is a direct results of the sustaining successes, we produced elsewhere in our business during 2013. We will continue our focus on providing clean, safe, reliable and affordable energy to customers and the communities we serve which supports our value proposition objectives for investors.

We are now ready to take your questions. So operator, we'll now take the first question.

Earnings Call Part 2:

• Q&A with Southern Company CEO